Equity and Debt Market Terminologies – NISM Series XV Short Notes (Part 3)
This is Part 3 of the NISM Series XV Research Analyst Short Notes series on PassNISM.in. This chapter covers important terminologies used in both the equity market and the debt market. These definitions are frequently tested in the NISM Research Analyst exam, so knowing them precisely matters.
Important Equity Market Terminologies Face Value
Face value (also called par value or nominal value) is the original price of a share as stated by the company at the time of issue. It appears on the share certificate. In India, common face values are ₹1, ₹2, ₹5, or ₹10. Face value is used to calculate dividends — for example, a 50% dividend on a ₹10 face value share means ₹5 per share dividend.
Book Value
Book value of a share is the net worth of the company divided by the total number of outstanding shares. It represents what each share would be worth if the company were liquidated at the values shown in the balance sheet. It is an accounting measure, not a market measure.
Formula: Book Value per Share = Shareholders' Equity / Total Outstanding Shares
Market Value
Market value is the current price at which a share trades on the stock exchange. It is determined purely by supply and demand — what buyers are willing to pay and what sellers are willing to accept at any given moment. Market value fluctuates continuously during trading hours.
Replacement Value
Replacement value is the estimated cost to replace all of a company's assets at current market prices. It changes with market conditions and is often used in asset-heavy industries like manufacturing and infrastructure. Replacement value is higher than book value in inflationary environments.
Intrinsic Value
Intrinsic value (also called fundamental value) is the true underlying value of a stock, calculated through fundamental analysis. It considers the company's future earnings potential, growth prospects, competitive position, and risk. If the market price is below the intrinsic value, the stock is considered undervalued.
Earnings — Historical, Trailing, and Forward
- Historical Earnings — Earnings reported in past accounting periods
- Trailing Earnings (TTM) — Earnings for the most recent 12-month period. Updated every month by adding the latest month and dropping the oldest
- Forward Earnings — Estimated earnings for a future period, typically the next fiscal year or the remaining quarters of the current fiscal year
Market Capitalisation (Market Cap)
Market capitalisation is the total market value of all outstanding shares of a company. It tells you how much it would cost to buy the entire company at its current stock price.
Formula: Market Cap = Market Price per Share × Number of Outstanding Shares
Market cap is used to classify companies:
- Large Cap (Blue Chip) — Top 50 to 100 companies by market cap. High liquidity, attract both retail and institutional investors
- Mid Cap — Next 200 to 500 companies. Good liquidity, medium market cap
- Small Cap — All remaining listed companies. Lower liquidity, higher risk
Exam Note: There is no fixed cutoff for large/mid/small cap. SEBI uses specific lists. For exam purposes, remember top 50–100 = large cap; next 200–500 = mid cap; remaining = small cap.
Enterprise Value (EV)
Enterprise Value is a more comprehensive measure of a company's total value than market cap alone. It accounts for both equity and debt, minus cash holdings.
Formula: EV = Market Capitalisation + Total Debt (Short-term + Long-term) − Cash and Cash Equivalents
EV represents the theoretical takeover price — what an acquirer would need to pay to buy the entire business, including taking on its debt and getting its cash.
Key Equity Ratios — Formulas You Must Know
| Ratio | Formula |
|---|---|
| Earnings Per Share (EPS) | Net Profit / Number of Outstanding Shares |
| Dividend Per Share (DPS) | Dividend Declared / Face Value of Share |
| Price to Earnings Ratio (PE) | Market Price per Share / Earnings per Share |
| Price to Sales Ratio (P/S) | Market Capitalisation / Annual Net Sales |
| Price to Book Value Ratio (P/B) | Current Market Price / Book Value per Share |
Differential Voting Rights (DVR)
A DVR share is similar to a regular equity share but carries less than one voting right per share. Companies issue DVR shares to raise capital without diluting the voting power of existing promoters. DVR shares often trade at a discount to regular shares.
Important Debt Market Terminologies Face Value (Bonds)
In the debt market, face value is the amount the issuer promises to repay to the bondholder at maturity. It is also called par value or principal. Coupon payments are calculated as a percentage of the face value.
Coupon Rate
The coupon rate is the fixed annual interest rate paid by a bond issuer on the face value of the bond. It is set at the time of issuance and remains constant for fixed-rate bonds. For example, a bond with ₹1,000 face value and 8% coupon rate pays ₹80 annually.
Maturity Value
The maturity value is the amount the issuer pays back to the bondholder when the bond matures. For most bonds, maturity value equals face value (par redemption). It is also called redemption value.
Principal
Principal refers to the original amount of money invested in a bond. It is the same as face value in most cases — the amount the issuer borrows and agrees to repay at maturity.
Redemption of a Bond
When a bond is redeemed, the contract between the issuer and investor ends. The issuer repays the principal amount and makes the final coupon payment. After redemption, the bond ceases to exist (the bond "matures").
Holding Period Return (HPR)
HPR measures the total return earned on an investment over a specific holding period. It includes both income received and price appreciation (or depreciation).
Formula: HPR = (End Value − Initial Value) / Initial Value
Current Yield
Current yield is a simple way to calculate the return on a bond. It divides the annual coupon payment by the current market price of the bond.
Formula: Current Yield = Annual Coupon / Current Market Price × 100
Current yield does not account for the time value of money or the gain/loss at maturity. It is a rough measure only.
Yield to Maturity (YTM)
Yield to Maturity (YTM) is the most widely used measure of return for bonds. It calculates the total return an investor will earn if the bond is held until maturity, assuming all coupon payments are reinvested at the same rate. YTM accounts for the current market price, face value, coupon payments, and time remaining to maturity.
YTM and bond price have an inverse relationship — when YTM rises, bond prices fall, and vice versa.
Duration
Duration measures the sensitivity of a bond's price to changes in interest rates. It is expressed in years. A bond with a duration of 5 years will fall approximately 5% in price for every 1% rise in interest rates.
- Higher duration = Greater price sensitivity to interest rate changes
- Zero coupon bonds have the highest duration (equal to their maturity)
- Short-term bonds have lower duration than long-term bonds
Modified Duration
Modified Duration refines the duration concept to give the exact percentage change in bond price for a 1% change in interest rates. While duration tells us the direction and scale of sensitivity, modified duration gives the precise magnitude.
Formula: Modified Duration = Duration / (1 + YTM)
Convexity
Convexity describes the non-linear (curved) relationship between bond prices and interest rates. Duration assumes a linear relationship, but in reality:
- When rates fall, bond prices rise more than duration predicts
- When rates rise, bond prices fall less than duration predicts
This asymmetry is called convexity and is a desirable property for bond investors. Higher convexity bonds are more valuable, all else equal.
Types of Bonds — NISM Exam Must-Know Zero Coupon Bonds
Zero coupon bonds pay no periodic interest (coupon). They are issued at a discount to face value and redeemed at par. The return is the difference between the purchase price and the face value received at maturity. Example: A bond with face value ₹1,000 issued at ₹750 — the ₹250 difference is the investor's return.
Floating Rate Bonds
These bonds have a variable coupon rate that is reset periodically based on a benchmark rate (such as MIBOR or repo rate). They protect investors from interest rate risk because the coupon adjusts with market rates.
Convertible Bonds
Convertible bonds start as debt instruments but give the investor the option to convert them into equity shares of the issuer at a predetermined price and date. They are attractive when the company's stock is expected to rise.
Principal Protected Notes (PPN)
A PPN is a structured product where the principal amount is protected if held to maturity. Typically, a portion of the investment is put into safe debt instruments to ensure principal repayment. The remaining portion is invested in higher-risk assets (equity, commodities, derivatives) for potential upside returns.
Inflation Protected Securities
These bonds adjust both the coupon and principal for inflation. The coupon rate is fixed, but it is applied to an inflation-adjusted principal. At maturity, the investor receives the higher of the original face value or the inflation-adjusted principal. This protects purchasing power over time.
Foreign Currency Bonds
Issued in a currency other than the issuer's home currency. Companies in developing economies issue these to access cheaper borrowing rates in international markets.
External Bonds / Masala Bonds
External bonds (Eurobonds) are issued in a country different from the bond's currency. Masala bonds are issued outside India but denominated in Indian Rupees — investors bear the currency risk.
Perpetual Bonds
Perpetual bonds have no maturity date. The issuer is never obligated to repay the principal. Investors receive periodic coupon payments indefinitely. They are common in banking (Additional Tier 1 bonds).
Key Formulas Summary — Debt Market
| Concept | Formula |
|---|---|
| Holding Period Return | (End Value − Initial Value) / Initial Value |
| Current Yield | Annual Coupon / Current Market Price × 100 |
| Modified Duration | Duration / (1 + YTM) |
| Enterprise Value | Market Cap + Debt − Cash |
Quick Revision: Exam-Focused Points
- Face value = nominal value; Book value = accounting value; Market value = trading price; Intrinsic value = fundamental value
- EPS = Net Profit / Outstanding Shares
- PE Ratio = Market Price / EPS (higher PE = growth expectation or overvaluation)
- EV is better than market cap as a valuation metric because it includes debt
- YTM is the most comprehensive return measure for bonds
- Bond prices and interest rates move in opposite directions
- Higher duration = higher interest rate sensitivity
- Zero coupon bonds issued at discount, redeemed at par
- Masala bonds = denominated in INR, issued outside India
- Perpetual bonds have no maturity — coupon paid forever
- DVR shares have less than 1 voting right per share
What Comes Next
This is Part 3 of our NISM Research Analyst Series XV Short Notes. The next Part 4 covers Fundamentals of Research — including the role of research in investment decisions, the difference between technical and fundamental analysis, insider information vs mosaic theory, and behavioural approaches to investing.
Take a free NISM mock test at Research Analyst Free Mock Test and test how well you know these terminologies.